New Home Office Tax Deduction Rule

Starting this year, there is a new home office tax deduction rule that can be applied. This is a new tax deduction rule that some home business owners might find easier to use than keeping track of everything that has to do with your home office.

What is the New Rule?

Basically, the new office tax deduction rule allows you to to take a deduction of $5 per square foot of home office space, up to $1,500. Your flat rate deduction (if you choose to take it) would include the deduction you would normally take for part of your mortgage and utilities.

In the past, taking the home office deduction has meant taking your office space, and figuring out how much of your home it is taking up. So, if you have a home office space of 200 square feet, and your home has 2,000 square feet, your home office takes up 10 percent.

Now, when you start figuring your deduction, you would take a 10 percent of your mortgage payments and utility payments as part of the calculation to see how much you can take.

Is It Right For You?

The flat-rate deduction is a “no doc” deduction, meaning that you claim the office space. The IRS still expects you to only deduct an area that you use exclusively for business, but it doesn’t require all the documentation and calculations necessary to take the more “traditional” version of the deduction.

Whether or not the new tax deduction works for you depends on the size of your office. In the example above, the deduction under the new rule is $1,000 ($5 x 200 square feet). However, whether or not that’s worth to you depends on whether or not you can get a bigger deduction the old way.

Let’s say you pay a mortgage of $1,500 per month, and your utilities average out to $300 a month. In this case, total expenses for the year would be $21,600. You can deduct 10 percent of that for your home office deduction under the old rules, bringing it to $2,160. As you can see, you’re better off under the old system in this case, since you normally get a deduction that is greater than the $1,500 cap on the flat rate deduction.

In my case, though, there really isn’t a lot of difference between the two. My home office area is small enough that the flat-rate version has an edge. Plus, it comes without the added hassle of extra calculations and documentation.

If you decide to use the new method for figuring your home office tax deduction, make sure that you continue to document all your other business expenses. This isn’t a license to ignore all of your documentation when taking deductions related to your home business. All this does is make it easier to take the home office tax deduction.

Consult with a knowledgeable tax professional to make sure that you are getting the best results for your home business. If you have questions, you should get a professional opinion to make sure that you are in compliance with IRS requirements.